Frontier Airlines 2010 Annual Report Download - page 121

The following table reconciles the Company’ s valuation allowance for the year ended December 31 (in thousands):
2010 2009 2008
Balance at January 1, $200,971 $ 9,523 $ 8,119
Additions based on current year acquisitions and 382 limitation
—
192,255
—
Additions based on filing the final pre-acquisition tax returns for Midwest and Frontier 5,759
—
—
Reduction of net operating losses previously reserved that were forgone in tax return
filings (36,356 )
—
—
Additions (deductions) for change in current year analysis (3,421 ) (807 ) 1,404
Balance at December 31, $166,953 $ 200,971 $ 9,523
During 2009, Republic acquired Midwest and Frontier. The future use of the net operating losses (“NOLs”) acquired from both
companies are limited based on Internal Revenue Code Section 382 due to the change in control that occurred from the acquisitions.
Management evaluated the deferred tax assets and determined that more likely than not, certain deferred tax assets would not be utilized and
therefore a valuation allowance was required. The net operating losses generated by the Company after the change in control date do not have
a related valuation allowance. In conjunction with filing the 2009 tax returns during 2010 for Frontier, the Company decided to forgo $104
million of the net operating losses that were acquired from Frontier. The Company reduced the deferred tax asset for these net operating
losses as well as the related valuation allowance when the tax returns were filed during 2010. This adjustment was accounted for as an
adjustment to the opening balance sheet for Frontier as a reduction to the net operating losses acquired and a decrease in the opening
valuation allowance. As of December 31, 2010, the Company has federal NOL carryforwards totaling $1.3 billion, which begin expiring in
2015, and of which approximately $345 million are not expected to be realized prior to expiration mostly due to the limitations under Internal
Revenue Code Section 382. Therefore, a valuation allowance has been recorded for these net operating loss carryforwards.
Deferred tax assets include benefits expected to be realized from the utilization of alternative minimum tax (“AMT”) credit
carryforwards of $8.2 million, which do not expire. A valuation allowance of $8.0 million has been recorded against AMT credit
carryforwards that were acquired during 2009 as these credits are not expected to be realized.
In connection with Midwest's initial public offering in 1995 (the “Offering”), Midwest and Kimberly-Clark entered into a Tax
Allocation and Separation Agreement (“Tax Agreement”). Pursuant to the Tax Agreement, Midwest is treated for tax purposes as if it
purchased all of Midwest's assets at the time of the Offering, and as a result, the tax basis of Midwest's assets were increased to the deemed
purchase price of the assets. The tax on the amount of the gain on the deemed asset purchase was paid by Kimberly-Clark. Midwest would
pay to Kimberly-Clark 90% of the amount of the tax benefit associated with this additional basis (retaining 10% of the tax benefit). In the
event of certain business combinations or other acquisitions involving Midwest, tax benefit amounts thereafter will not take into account,
under certain circumstances, income, losses, credits, or carryovers of businesses other than those historically conducted by Midwest. These
tax benefits will not be realized by the Company as the losses are limited based on Section 382 and a full valuation allowance has been
recorded for these NOLs. Therefore, management has determined that no liability is necessary related to this Tax Agreement.
15. RETIREMENT AND BENEFIT PLANS
Defined Contributions Plans — The Company has defined contribution retirement plans covering substantially all eligible
employees. The Company matches up to 6% of eligible employees' wages. Employees are generally vested in matching contributions
after three years of service with the Company. Employees are also permitted to make pre-tax contributions of up to 90% (up to the
annual Internal Revenue Code limit) and after-tax contributions of up to 10% of their annual compensation. The Company's expense
under this plan was $8.2 million, $3.8 million, and $3.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Frontier also has established the Frontier Airlines, Inc. Pilots Retirement Plan (the “FAPA Plan”) for pilots covered under the
collective bargaining agreement with the Frontier Airlines Pilots’ Association. The FAPA Plan is a defined contribution retirement
plan. Frontier contributes up to 6% of each eligible and active participant’ s compensation. Contributions begin after a pilot has reached two
years of service and the contributions vest immediately. Participants are entitled to begin receiving distributions of all vested amounts
beginning at age 59 ½. During the period from October 1, 2009 to December 31, 2009, Frontier recognized compensation expense associated
with the contributions to the FAPA Plan of $1.1 million. The recognized compensation